Energy Regulatory Update (UK) – May

Our energy regulatory teams across Europe provide updates to clients on a regular basis. This newsletter contains a selection of recent UK news items of relevance to the energy transition and more generally to the energy and natural resources sector. It identifies developments of a policy or regulatory nature considered to be of interest by the contributors.

 

Contracts for Difference Scheme / Clean Industry Bonus

The CfD Clean Industry Bonus scheme

The Clean Industry Bonus (CIB), formerly known as the Sustainable Industry Rewards, was introduced into the Contracts for Difference (CfD) scheme (the UK’s main renewable energy support scheme) in 2024. The CIB currently provides extra CfD revenue support to offshore wind developers who invest in supply chains in the UK’s poorest communities, or in cleaner supply chains.

On 11 May 2026, DESNZ published the government’s response to the consultation launched on 4 March 2026 titled ‘The Contracts for Difference Clean Industry Bonus: Consultation on contract changes for Allocation Round 8’ – the latter invited views on the proposed changes to the CfD contract that would need to be made to implement some of the positions set out in the government’s response of 4 February 2026 to its earlier consultation (launched on 23 August 2025) on proposed changes to be introduced to the CIB scheme ahead of CfD Allocation Round 8 (AR8). As noted in the ‘Next steps’ section of the response document of 11 May 2026, the CIB application window opened on 13 May 2026 and closed on 21 May 2026.

Earlier in May, DESNZ published the initial CIB budget notice as given to the National Energy System Operator and the Low Carbon Contracts Company pursuant to regulation 13A of the Contracts for Difference (Allocation) Regulations 2014 (as amended) and paragraph 16.2 of the Contracts for Difference Scheme for Renewable Electricity Generation Allocation Round 8: Clean Industry Bonus Allocation Framework 2026 (as published by DESNZ). This notice applies to CfD AR8. The initial budget applicable to the CIB for AR8 is GBP200 million. This may be revised with the final budget notice.

Information regarding CfD AR8 can be found on DESNZ’s CfD Allocation Round 8 collection page. The indicative timeline for AR8 is available on the CfD Allocation Round Resource Portal.

CfD eligible generators – existing nuclear

The draft Contracts for Difference (Definition of Eligible Generator) (Amendment) Regulations 2026 were laid in Parliament on 14 May 2026 using the draft affirmative procedure – they were published with a draft explanatory memorandum. This instrument amends the CfD legislative framework to enable a CfD to be offered to an existing nuclear generating station to support the continuation of its generation. The amendment made by this instrument (which is to regulation 3 (Definition of eligible generator) of the Contracts for Difference (Definition of Eligible Generator) Regulations 2014) expands the scope of nuclear plants that are eligible for CfD support so that, where appropriate, existing nuclear generating stations (continuing to generate electricity) may access a long-term revenue stabilisation mechanism to extend their operational life. The instrument is enabling in nature (concerning eligibility only) and does not mandate the award of CfDs to any individual nuclear generating station.

Electricity Generator Levy – HMRC May Update

By way of background, on 21 April 2026 DESNZ announced (amongst more) proposed changes in respect of the Electricity Generator Levy (EGL) (ie. the levy enacted by Part 5 of the Finance (No. 2) Act 2023), and a Ministerial statement on the levy increase was made to Parliament. Following this, on 6 May 2026, HM Revenue & Customs (HMRC) published further information on the changes regarding the EGL in a technical note, which sets out:

• the increase in the EGL rate from 45% to 55%;
• how the change applies from 1 July 2026 (the increase will be applicable to receipts attributable to electricity generated from that date); and
• how receipts should be treated where a ‘qualifying period’ straddles the commencement date of 1 July 2026 (EGL is charged on receipts attributable to a ‘qualifying period’).

The ‘Background’ section to the HMRC technical note of 6 May reads as follows: “The price for gas sets the price for electricity in the UK and in times of high gas prices this results in non-gas generators accruing windfalls because of high prices without a similar increase in input costs. The EGL is a charge on the receipts of certain generators that benefit, typically wind and solar generators".

The above Ministerial statement of 21 April explains how “When gas prices are high, renewable generators that are not in receipt of Contracts for Difference receive substantial increases in revenue because they can sell the electricity they generate at higher prices, without having any new costs”.

Offshore Transmission Owners - OFTO Build models

On 7 May 2026, Ofgem (the energy regulator) published a consultation titled ‘OFTO Build: Early and Late Competition Models’. The consultation description notes how, in September 2025, Ofgem published a call for input to seek views on its proposals for developing an early competition Offshore Transmission Owner (OFTO) build model. Building on feedback to the call for input, the consultation of 7 May sets out detailed proposals for the early competition OFTO build model, including in respect of:

• the tender process;
• evaluation criteria;
• commercial framework; and
• mandatory application of the model in certain circumstances.

The proposals consider the applicability of the early competition OFTO build model to both radial assets and non-radial assets. This model has been informed by principles from the early competition onshore competitively appointed transmission owner (CATO) model.

Ofgem is also updating the existing late competition OFTO build model to support its ambition to provide the greatest possible flexibility for the development of offshore transmission assets. The consultation of 7 May seeks industry views on the best way to do this to ensure that the model is fit for purpose for the future offshore transmission landscape.

Ofgem’s aim is for the earliest possible deployment of the early competition OFTO build model, with the regulatory foundation for it to be established in advance of upcoming offshore network projects planned under National Energy System Operator’s Centralised Strategic Network Plan. By doing this, Ofgem will create a clear pathway, ensuring market participants have certainty on the available delivery frameworks before project-specific tenders are launched. Ofgem aims to develop a minded-to-position by winter 2026.

For the late competition OFTO build model, Ofgem aims to be in a position to open the first set of tenders for projects from the end of 2026. This will necessitate a decision document, the production of a model OFTO build licence and any necessary guidance, as well as any further consultations over the course of 2026. Ofgem is keen to hear from developers who would be interested in applying to be a potential pilot project for the late competition model.

Government’s Legislative Programme – Energy

On 13 May 2026, the Prime Minister’s Office published the ‘King’s Speech 2026: background briefing notes’. This relates to the King’s Speech of that day, which announced the Bills that the government will be introducing to Parliament in the new Parliamentary session, including the following of relevance to the energy sector (page numbers given below refer to the briefing notes):

• Energy Independence Bill – pages 103 to 106 – this Bill is to cover a number of policy aims, including measures to accelerate the deployment of clean power and the build-out of grid infrastructure. It will also introduce powers needed to take a more strategic approach to planning and building energy infrastructure and to operate the electricity system more efficiently;
• Nuclear Regulation Bill – pages 107 to 109 – this Bill is to modernise the way that new nuclear projects are regulated so the government can deliver safe, secure and affordable nuclear power and infrastructure sooner, while maintaining strong environmental protections;
• Electricity Generator Levy Bill – pages 110 and 111 – this is the Bill to deliver the increase in the Electricity Generator Levy announced on 21 April 2026; and
• European Partnership Bill – pages 16 to 18 – the key facts as set out on those pages include references to emissions trading and carbon borders, and to electricity trading.

The above Bills have not, at the time of writing at the end of May, been published.

Capacity Market changes

The Capacity Market (CM) was first introduced in 2014 as part of the Electricity Market Reform programme to support investment in capacity. Existing and new build electricity capacity providers compete to obtain CM Agreements under which they commit to deliver capacity when needed, in return for guaranteed regular payments.

Hydrogen to power and interconnectors and the CM

On 14 May 2026, DESNZ published the government’s response to the ‘Call for evidence on Hydrogen to Power and interconnectors’ of 2 October 2025, which sought views on enabling the participation of Hydrogen to Power (H2P) (the conversion of low carbon hydrogen to produce electricity) in the CM, and technical changes to setting interconnector de-rating factors. The response confirms the changes to the methodology used to calculate interconnector de‑rating factors (which will be implemented ahead of the opening of CM Prequalification for 2026), and outlines the government’s ongoing approach to enabling H2P participation.

Proposed CM changes for Prequalification 2026

On the same day, DESNZ published the government’s response to the consultation on proposed Capacity Market changes ahead of Prequalification 2026. The response confirms a package of reforms to strengthen delivery assurance, improve auction efficiency, support participation from technologies such as demand side response and battery storage, and introduce an interim sustainability approach for certain low‑carbon generation. The response also confirms a number of administrative and rule clarifications to support effective market operation and value for money. The changes will be implemented ahead of CM Prequalification opening in July 2026.

Integrating low carbon technologies and enhancing delivery assurance

Also on 14 May, DESNZ published the government’s response to the consultation on proposals to integrate low carbon technologies and enhance delivery assurance ahead of Prequalification 2026. The response confirms changes to be implemented ahead of CM Prequalification 2026 to improve delivery assurance, support participation from low‑carbon technologies such as long‑duration electricity storage (LDES), clarify secondary trading rules, and allow certain generators with directly awarded Contracts for Difference to continue participating where there is no overlap in support. Section 4 (Long-Duration Electricity Storage Cap and Floor) of the response document gives the government’s position on a range of proposals relating to the participation in the CM of LDES projects that have been awarded an LDES cap and floor (C&F) following a C&F application window.

CM amendment regulations to implement measures consulted on

The draft Electricity Capacity (Amendment and Transitional Provision) Regulations 2026 were laid in Parliament on 14 May 2026 together with a draft explanatory memorandum. This instrument amends the Electricity Capacity Regulations 2014, the Electricity Capacity (Supplier Payment etc.) Regulations 2014 and the Electricity Capacity (No. 1) Regulations 2019 to implement the relevant technical reforms to the CM that were consulted on.

The changes aim to maintain security of electricity supply, align the scheme with the government’s decarbonisation objectives, and improve its functionality and efficiency to ensure it remains fit for purpose in a rapidly evolving energy system. One of the amendments is to create an exception to the exclusion of CM units of generation (CMUs) from participation in the CM if they receive support under other specified low-carbon support schemes such as a CfD. The exception ensures that where a CfD is awarded to a generator following a direction from the Secretary of State (SoS), the generator is allowed to enter the CM, so long as it declares that the CfD will not commence whilst it has a ‘Capacity Obligation’ under the CM (distinction is made between a CfD awarded following a direction from the SoS, and a CfD awarded in an allocation round auction).

There are also changes (amongst others) relating to: (i) the withholding of CM credit once the Settlement Body becomes aware that a CMU is subject to insolvency proceedings, and how this credit can be paid if a termination notice for insolvency is subsequently withdrawn; and (ii) increases in the credit cover required if there is a failure to meet CM rules on financial commitments.